The CBO Minimum Wage Report Proves State Policies Matter

February 19, 2014

Expect to hear a lot from both sides of the aisle about the new minimum wage report out Tuesday from the nonpartisan Congressional Budget Office. On one hand, it found that a federal minimum wage hike would bump up earnings for 16.5 million people. On the other hand, 500,000 people will lose their jobs. It’s not exactly the most stunning conclusion—a minimum wage hike will help a lot and hurt a few.

But embedded in the nearly 40-page report are two other takeaways — both of which show why states matter so much to federal policy. There’s the obvious: State policies serve as laboratories of policy. And CBO compared them to one another to suss out what effect a national wage hike might have. The other may not be so clear, but it’s an important one: the population affected by a new federal policy can vary widely by state thanks to how state and federal policies interact. Here’s how:

The nation is a patchwork of minimum wage laws. About half of America’s workers live in the 29 states where the minimum wage matches the federal minimum of $7.25. A fourth live in states where it’s $8.01 or higher. (Washington state’s is highest, at $9.32.) And a fourth of workers live in states where it’s somewhere in the middle.

As with almost all economic policies, there would be ripple effects from a federal hike. Obviously, anyone earning below the new proposed federal minimum of $10.10 would be affected. But so, too, would some workers who are just above that level. If you’re earning four dollars above the current minimum wage and suddenly that rises by nearly three dollars, your pay might get bumped by market forces even if it’s still technically above minimum wage.

But the size of that ripple effect, it turns out, is directly related to a state’s minimum wage. In fact, it’s kind of easy to calculate, according to CBO, and it can have a big impact on what slice of a state’s residents is affected. The size of the ripple effect above and beyond the proposed federal $10.10 level is about half of the difference between that and the state’s current minimum.

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